This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

ITC Vs BAT: Like father unlike son!

Mar 20, 2006

Despite the incidence of health problems and rising prices of cigarettes, consumers still find these products entirely seductive. This makes us believe that there are real fortunes to be made, especially in our country where the per-capita consumption of cigarettes is a mere tenth of the world average. In this article, we compare BAT, the world’s second largest tobacco company with our very own ITC. Here are the key takeaways.
About BAT
British American Tobacco (BAT) was spun off in the reorganization of B.A.T Industries. It the world's second largest tobacco firm (behind the Marlboro maker, Altria Group) with a market share of about 15%. The company sells nearly 855 bn cigarettes in more than 190 countries. BAT has shifted its focus to emerging markets like Korea, Vietnam, and Nigeria for growth and is planning to build a factory in China, the world's top tobacco market, consequently moving its Asian headquarters to Hong Kong.

BAT in a nutshell…

(Rs m)

CY02

CY03

CY04

CAGR

Net revenues

1,827,821

1,889,066

2,468,918

16.2%

Expenditure

611,996

627,370

643,547

2.5%

EBITDA

1,215,825

1,261,697

1,825,372

22.5%

% margin

66.5%

66.8%

73.9%

Profit after tax

101,416

61,714

95,012

-3.2%

% margin

5.5%

3.3%

3.8%

EPS (Rs)

78.0

41.3

78.8

P/E ratio (x)

14.4

* Provisional results
1 Sterling Pound = Rs 78

About ITC
ITC commands about 70% of India’s Rs 130 bn domestic cigarette market (value terms). Out of the top 10 brands in India, 6 belong to ITC. The growing awareness on harmful effects of tobacco as well as the government’s punitive tax policy, forced ITC to move towards de-risking its revenue profile. Consequently, it merged the paperboards subsidiary with itself and invested in growing its hospitality, retailing, packaged foods and IT businesses. Consequently, the ITC group has emerged as the second largest luxury hotel chain after Indian Hotels. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta and Salt), confectionery (Mint-O and Candyman) and biscuits. ITC has also entered into garment retailing and has 42 Wills Lifestyle stores. Other initiatives include greeting cards (20% market share), safety matches and incense sticks. BAT, the company’s parent holds a 32% stake in the company.

ITC in a nutshell

(Rs m)

FY03

FY04

FY05

CAGR

Net revenues

60,350

66,950

78,750

14.2%

Expenditure

37,120

41,100

48,470

14.3%

EBITDA

23,230

25,850

30,280

14.2%

% margin

38.5%

38.6%

38.5%

Profit after tax

13,710

15,390

18,370

15.8%

% margin

22.7%

23.0%

23.3%

EPS (Rs)

55.4

64.3

90.0

P/E ratio (x)

29.2

ITC as a % of BAT

Revenues

3.2%

Expenditure

7.5%

EBDITA

1.7%

Net profit

19.3%

As can be seen from the table alongside, BAT has grown at a faster pace than ITC. One of the reasons for the same could be attributed to the fact chewing tobacco has been a tradition in India for centuries. Of the total amount of tobacco produced in the country, around 48% is in the form of chewing tobacco, 38% as bidis and only 14% as cigarettes.

Major Brands

BAT

ITC

Pall Mall

India Kings

Dunhill

Goldflake

Kent

Navycut

Lucky Strike

Bristol

Vogue

Wills

Thus, bidis, snuff and chewing tobacco form the bulk (86%) of India's total tobacco production. In the rest of the world, cigarettes accounts for around 90% of total production of tobacco-related products. This unique tobacco consumption pattern is a combination of tradition and more importantly, the tax imposed on cigarettes over the last 2 decades. In contrast, in the United Kingdom, cigarette accounted for around 75% of total consumption (rest contributed by cigars and pipe).

Just to put things in perspective, while around 73% of ITC’s revenues is from cigarettes, BAT has a concentrated revenues mix (tobacco-related product account for 100% of revenues). The net margins of ITC (23.3% in FY05) are much higher as compared to BAT (3.8% in CY04). It must be noted here that ITC’s hotel division margins are amongst the highest in the industry at 35%+ levels.

What to expect?
Despite high government intervention and campaigns against smoking, ITC has managed to grow its portfolio and going forward, we expect it to outperform its peers. As disposable incomes increase, people might shift from bidis to cigarettes and hence, upside from conversion exists. Also, demand for cigarettes is relatively inelastic, owing to its habitual nature.

Further, the company has emerged as the second largest player in the hospitality sector in India, behind Indian Hotels (The Taj Group). ITC has around 5,200 rooms, of which 3,200 are owned while the rest are managed properties. The company plans to open new hotels in Bangalore, Chennai and Hyderabad in the next 3 to 5 years. This division continues to benefit from capacity expansion as well as the upturn in the industry's occupancy rate. Margins are also likely to be robust going forward. With this expansion, the company's rooms under management will increase by 750. To conclude, we expect the cigarette business to remain the mainstay for ITC in the future. However, its other businesses, especially paperboards and hotels, are likely to contribute greater to the overall growth. We had recently assigned a ‘HOLD’ rating on the stock and we continue to remain positive on the company’s future prospects.

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.